Foreign Income Tax Rules
US citizens abroad still owe US tax on worldwide income; learn the exclusion, the credit, and what to file.
TL;DR
- The US taxes citizens on
worldwideIncome, wherever they live. - Use the
FEIEto exclude up to $132,900 of foreign wages in 2026. - Or use the
FTCto offset US tax with the foreign tax you paid.
Taxed on Worldwide Income
Citizenship-BasedThe US taxes citizens wherever they live and earn.
File US taxes from anywhereTwo Tax SystemsYour host country taxes you too, risking double tax.
Local tax + US taxStill Must FileYou file even if tools zero out your US tax.
Filing is required, not optionalTwo Main ToolsThe exclusion and the credit prevent double tax.
FEIE or FTC, rarely bothThe Exclusion (FEIE)
2026 LimitExclude this much foreign earned income from US tax.
Up to $132,900Earned Income OnlyWages and self-employment count; investments do not.
No dividends, interest, pensionsTwo TestsQualify by residency or days spent abroad.
Bona fide resident or 330 daysFiled on Form 2555Claim the exclusion with this form.
Form 2555 with your 1040The Credit (FTC)
Dollar for DollarForeign income tax paid offsets your US tax.
Foreign tax reduces US taxIncome Tax OnlyVAT, sales, and property taxes do not count.
Only foreign income tax qualifiesCarryforwardUnused credit carries back 1 year, forward 10.
Back 1, forward 10 yearsFiled on Form 1116Claim the credit with this form.
Form 1116 (small amounts skip it)Report Your Accounts
FBARReport foreign accounts over $10,000 combined.
FinCEN Form 114FATCAReport larger foreign assets with your return.
Form 8938Info, Not TaxThese are reports; skipping them still brings penalties.
No tax, but big penaltiesSelf-Employment TaxThe FEIE does not erase US SE tax on your profit.
15.3% unless totalization appliesTips
- Pick the
FEIEin a low-tax country and theFTCin a high-tax one, since the credit only helps when you actually paid foreign tax. - File the
FBARif your foreign accounts together topped $10,000 at any point, even for a day, since the penalties dwarf the effort.
Warnings
- Income you exclude under the
FEIEstill owes US self-employment tax of 15.3% unless a totalization agreement covers you. - The
stackingRuletaxes your remaining income as if the excluded amount were still on top, so it can land in higher brackets.
In Practice
See how the exclusion wipes out US income tax for an expat with no local income tax.
You are a single US citizen working in a country with no income tax, earning $110,000 in foreign wages, and you meet the 330-day test.
- The 2026 FEIE limit is $132,900.
- Your $110,000 is under the limit, so all of it can be excluded.
- US income tax on those wages: $0.
- You still file a return, and an FBAR if accounts topped $10,000.
The FEIE erases US income tax on the full $110,000.
The exclusion shines in low-tax countries; use the credit in high-tax ones.
FAQ
Yes. The US uses citizenship-based taxation, so citizens and green-card holders must file US returns and report worldwide income no matter where they live. Most other countries tax only residents. This is why an American abroad can face two tax systems at once, and why the exclusion and credit exist to prevent double tax.
The FEIE, claimed on Form 2555, lets qualifying expats exclude up to $132,900 of foreign wages from US income tax in 2026. You qualify by being a bona fide resident of another country or by spending at least 330 full days abroad in a 12-month period. It covers earned income only, not dividends, interest, or pensions.
Use the FEIE in a low-tax or no-tax country, where there is little foreign tax to credit. Use the FTC in a high-tax country, where the foreign tax you paid can wipe out your US tax and leave a carryforward. You can switch, but revoking the FEIE locks you out of it for five years, so choose deliberately.
Both are information reports about foreign accounts, not extra taxes. The FBAR (FinCEN Form 114) is required if your foreign accounts together exceeded $10,000 at any point in the year. FATCA (Form 8938) kicks in at higher balances and files with your return. Penalties for skipping them are steep, even when no tax is owed.